Economy, dollar, trade key to US stocks’ global edge

NEW YORK: The ability of the US stock market to keep an edge this year over equities elsewhere in the world hinges on the US maintaining its economic and earnings growth advantage, the strength of the dollar and how global trade tensions resolve, investors said.

Spurred by fiscal policy benefits including a corporate tax cut, the US economy’s standout momentum relative to other regions has underpinned Wall Street’s advantage this year, investors said.

“The outperformance of US stocks reflects not just earnings, but expectations about US economic growth versus other regions,” said Kristina Hooper, chief global market strategist at Invesco.

“Conventional investor wisdom is that the US is going to continue to outperform other economies this year and hence investors should move more of their exposure to the US,” Hooper said.

A clearer read of the US economy comes next week with data such as the government’s monthly employment report on Friday and quarterly results from more than 140 S&P 500 companies, including Apple.

According to an International Monetary Fund report this month, the US is projected to post economic growth of 2.9 per cent this year, up from 2.3 per cent in 2017, while European advanced economies, and Japan and China, have slower growth than a year ago.

The US economy grew 4.1 per cent in the second quarter, data on Friday showed, its fastest pace in nearly four years.

While returns for the US benchmark S&P 500 index trail last year’s – they are up six per cent so far in 2018 against a 10.5 per cent gain at a similar point in 2017 – US equities are easily beating indexes covering Europe, Japan and emerging markets after lagging or just keeping pace for all of last year. Near all-time peak

After rebounding from a 10-per cent correction earlier this year, the S&P 500 is close to an all-time high and on track for its best year relative to stocks in the rest of the world since 2014.

“Returns themselves have been lower than many investors have come to expect. But on a relative basis, the US continues to be the market leader,” said Michael Arone, chief investment strategist at State Street Global Advisors.

US stocks separated from equities elsewhere in particular during the second quarter, with investors citing a divergence in growth expectations.

Citi Research’s gauge on US economic data surprises was solidly positive in April and May, when its barometer for euro zone surprises was sharply negative.

“There was a change in expectation from synchronized global growth to US growth being better than the rest of the world really due to the fiscal tailwinds,” said Sunitha Thomas, regional portfolio manager for Northern Trust Wealth Management.

The dollar surged against other major currencies starting in the second quarter, and investors said the greenback’s path will be an important factor determining relative equity performance.

The dollar’s gains aided US equity fund returns against international funds, which required a costly translation into the greenback, investors said.

The dollar’s strength weighed on emerging markets, where debt costs have increased and weaker currencies sparked an investor retreat. Emerging market stocks overall have particularly lagged this year, declining six per cent.

“All of these fundamental factors in emerging markets were triggered by the stronger US dollar that were not good for economic momentum in those countries,” Thomas said. — Reuters